<PAGE> 1
===============================================================================
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
----- -----
COMMISSION FILE NUMBER 1-10570
BJ SERVICES COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0084140
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5500 NORTHWEST CENTRAL DRIVE, HOUSTON, TEXAS 77092
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 462-4239
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
There were 38,310,572 shares of the registrant's common stock, $.10 par value,
outstanding as of February 12, 1997.
- -------------------------------------------------------------------------------
===============================================================================
<PAGE> 2
BJ SERVICES COMPANY
INDEX
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statement of Operations (Unaudited) - Three
months ended December 31, 1996 and 1995 3
Consolidated Condensed Statement of Financial Position -
December 31, 1996 (Unaudited) and September 30, 1996 4
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Three months ended December 31, 1996 and 1995 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION 19
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
----------- ---------
<S> <C> <C>
Revenue $ 341,092 $ 206,501
Operating expenses:
Cost of sales and services 271,957 167,086
Research and engineering 5,224 3,744
Marketing 11,571 8,283
General and administrative 12,368 8,489
Goodwill amortization 3,784 1,342
--------- ---------
Total operating expenses 304,904 188,944
--------- ---------
Operating income 36,188 17,557
Interest expense (8,320) (5,538)
Interest income 41 79
Other income - net 83 600
--------- ---------
Income before income taxes 27,992 12,698
Income taxes 8,018 3,553
--------- ---------
Net income $ 19,974 $ 9,145
========= =========
Earnings per share:
Primary $ .49 $ .32
Fully diluted $ .49 $ .32
Weighted average shares outstanding:
Primary 40,626 28,475
Fully diluted 41,091 28,660
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE> 4
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,215 $ 2,897
Receivables - net 283,881 271,583
Inventories:
Finished goods 61,959 59,926
Work in process 3,734 9,479
Raw materials 19,227 17,696
---------- ----------
Total inventories 84,920 87,101
Deferred income taxes 16,390 19,349
Other current assets 39,615 37,217
---------- ----------
Total current assets 430,021 418,147
Property - net 574,538 558,156
Deferred income taxes 128,828 132,666
Goodwill - net 578,903 567,260
Other assets 16,265 32,931
---------- ----------
$1,728,555 $1,709,160
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 140,683 $ 141,966
Short-term borrowings and current
portion of long-term debt 60,488 34,358
Accrued employee compensation and benefits 30,200 32,227
Income and other taxes 14,585 13,698
Accrued insurance 13,252 13,282
Other accrued liabilities 58,938 56,494
---------- ----------
Total current liabilities 318,146 292,025
Long-term debt 494,036 523,004
Deferred income taxes 11,877 11,740
Accrued post retirement benefits and other 38,721 40,688
Stockholders' equity 865,775 841,703
---------- ----------
$1,728,555 $1,709,160
========== ==========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE> 5
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,974 $ 9,145
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of unearned compensation 375 330
Depreciation and amortization 22,799 14,371
Deferred income taxes 4,455 571
Changes in:
Receivables (10,337) (1,918)
Inventories 5,521 (3,958)
Accounts payable (3,596) 4,002
Other current assets and liabilities (2,011) (9,860)
Other - net (10,052) 414
-------- --------
Net cash provided by operating activities 27,128 13,097
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (14,538) (10,408)
Proceeds from disposal of assets 1,599 319
Acquisition of business, net of cash acquired (13,464) (3,700)
-------- --------
Net cash used for investing activities (26,403) (13,789)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - net 987
Reduction of borrowings - net (2,838)
Proceeds from issuance of stock 4,431 1,662
-------- --------
Net cash provided by financing activities 1,593 2,649
Increase in cash and cash equivalents 2,318 1,957
Cash and cash equivalents at beginning of period 2,897 1,842
-------- --------
Cash and cash equivalents at end of period $ 5,215 $ 3,799
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE> 6
BJ SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 GENERAL
In the opinion of management, the unaudited consolidated condensed financial
statements for BJ Services Company (the "Company") include all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial position as of December 31, 1996, and the results
of operations and cash flows for each of the three month periods ended December
31, 1996 and 1995. The consolidated condensed statement of financial position
at September 30, 1996 is derived from the September 30, 1996 audited
consolidated financial statements. Although management believes the disclosures
in these financial statements are adequate to make the information presented
not misleading, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of
operations and the cash flows for the three-month period ended December 31,
1996 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 EARNING PER SHARE
Primary earnings per share are based on the weighted average number of shares
outstanding during each period and the assumed exercise of dilutive stock
options and warrants less the number of treasury shares assumed to be purchased
from the proceeds using the average market price of the Company's common stock
for each of the periods presented.
Fully diluted earnings per share are based on the weighted average number of
shares outstanding during each period and the assumed exercise of dilutive
stock options and warrants less the number of treasury shares assumed to be
purchased from the proceeds using the closing market price of the Company's
common stock for each of the periods presented.
The following table presents information necessary to calculate earnings per
share for the period presented (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------
1996 1995
------- --------
<S> <C> <C>
Net income $19,974 $ 9,145
======= =======
Average primary common and common equivalent
shares outstanding:
Common stock 38,209 28,015
Common stock equivalents from assumed exercise
of stock options 814 460
Common stock equivalents from assumed exercise
of warrants 1,603
------- -------
40,626 28,475
======= =======
Primary earnings per share $ .49 $ .32
======= =======
Average fully diluted common and common equivalent
shares outstanding:
Common stock 38,209 28,015
Common stock equivalents from assumed exercise of
stock options 908 645
Common stock equivalents from assumed exercise of
warrants 1,974
------- ------
41,091 28,660
======= =======
Fully diluted earnings per share $ .49 $ .32
======= =======
</TABLE>
NOTE 3 ACQUISITION OF BUSINESS
Effective December 1, 1996, the Company acquired the remaining 51% interest in
its previously unconsolidated joint venture in Argentina, for total
consideration of $13.5 million which was funded through borrowings under
existing credit facilities. This acquisition was accounted for as a purchase
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition. The consolidated
statement of operations includes operating results of the subsidiary acquired
since the date of acquisition. This acquisition is not material to the
Company's financial statements and therefore pro forma information is not
presented.
NOTE 4 SUPPLEMENTAL GUARANTOR INFORMATION
In August 1996, the Company exchanged 7% Series B Notes due 2006 (the "7%
Series B Notes") for its then outstanding unsecured 7% Notes due 2006. Three of
the Company's subsidiaries, BJ Services Company, U.S.A., BJ Service
International, Inc. and BJ Services Company Middle East (collectively, the
"Guarantor Subsidiaries"), are guarantors of the 7% Series B Notes. Each of the
Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and
several basis, the Company's obligation to pay principal and interest with
respect to the 7% Series B Notes.
Substantially all of the Company's operating income and cash flow is generated
by its subsidiaries. As a result, funds necessary to meet the Company's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Company's
6
<PAGE> 7
subsidiaries, could limit the Company's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the 7% Series B Notes. Although
holders of the 7% Series B Notes are direct creditors of the Company's
principal direct subsidiaries by virtue of the guarantees, the Company has
subsidiaries ("Non- Guarantor Subsidiaries") that are not included among the
Guarantor Subsidiaries, and such subsidiaries are not obligated with respect to
the 7% Series B Notes. As a result, the claims of creditors of the
Non-Guarantor Subsidiaries will effectively have priority with respect to the
assets and earnings of such companies over the claims of creditors of the
Company, including the holders of the 7% Series B Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed statements of financial position as of
December 31, 1996 and September 30, 1996, consolidating condensed statements of
operations for each of the three-month periods ended December 31, 1996 and 1995
and consolidating condensed statements of cash flows for each of the
three-month periods ended December 31, 1996 and 1995.
2. BJ Services Company (the "Parent"), combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries with their investments in subsidiaries
accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the 7% Series B Notes are material to investors in the 7%
Series B Notes.
7
<PAGE> 8
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 193,360 $ 156,087 $ (8,355) $341,092
Operating expenses:
Cost of sales and services 155,438 124,874 (8,355) 271,957
Research and engineering 1,848 3,376 5,224
Marketing 8,152 3,419 11,571
General and administrative 6,285 6,083 12,368
Goodwill amortization 1,122 2,662 3,784
------- ------------- ------------- -------- --------
Total operating expenses 172,845 140,414 (8,355) 304,904
------- ------------- ------------- -------- --------
Operating income 20,515 15,673 36,188
Interest income 952 351 (1,262) 41
Interest expense (5,747) (3,835) 1,262 (8,320)
Income from equity investees 19,974 7,966 (27,940)
Other income (expense) - net 273 (190) 83
------- ------------- ------------- -------- --------
Income before income taxes 19,974 23,959 11,999 (27,940) 27,992
Income tax expense 3,985 4,033 8,018
------- ------------- ------------- -------- --------
Net income $19,974 $ 19,974 $ 7,966 $(27,940) $ 19,974
======= ============= ============= ======== ========
</TABLE>
8
<PAGE> 9
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ $140,027 $75,085 $ (8,611) $206,501
Operating expenses:
Cost of sales and services 118,296 57,401 (8,611) 167,086
Research and engineering 3,558 186 3,744
Marketing 6,542 1,741 8,283
General and administrative 5,177 3,312 8,489
Goodwill amortization 1,167 175 1,342
------ -------- ------- -------- --------
Total operating expenses 134,740 62,815 (8,611) 188,944
------ -------- ------- -------- --------
Operating income 5,287 12,270 17,557
Interest income 363 78 (362) 79
Interest expense (4,808) (1,092) 362 (5,538)
Income from equity investees 9,145 7,769 (16,914)
Other income (expense) - net 623 (23) 600
------ -------- ------- -------- --------
Income before income taxes 9,145 9,234 11,233 (16,914) 12,698
Income tax expense 89 3,464 3,553
------ -------- ------- -------- --------
Net income $9,145 $ 9,145 $ 7,769 $(16,914) $ 9,145
====== ======== ======= ======== ========
</TABLE>
9
<PAGE> 10
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF FINANCIAL POSITION
(IN THOUSANDS)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,215 $ $ 5,215
Receivables - net 117,820 166,061 283,881
Inventories - net 39,780 45,140 84,920
Deferred income taxes 16,390 16,390
Other current assets 5,396 34,219 39,615
-------- -------- -------- ----------- ----------
Total current assets 184,601 245,420 430,021
Investment in subsidiaries 233,743 157,608 (391,351)
Intercompany advances 632,655 (632,655)
Property - net 289,285 285,253 574,538
Deferred income taxes 111,310 17,518 128,828
Goodwill - net 153,813 425,090 578,903
Other assets 11,289 4,976 16,265
-------- -------- -------- ----------- ----------
Total assets $866,398 $907,906 $978,257 $(1,024,006) $1,728,555
======== ======== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,135 $ 54,548 $ $ 140,683
Short-term borrowings and
current portion of long-term debt 6,700 53,788 60,488
Accrued employee
compensation and benefits 19,263 10,937 30,200
Income and other taxes 3,851 10,734 14,585
Other accrued liabilities 623 36,052 35,515 72,190
-------- -------- -------- ----------- ----------
Total current liabilities 623 152,001 165,522 318,146
Long-term debt 294,482 199,554 494,036
Deferred income taxes 11,877 11,877
Accrued post retirement
benefits and other 38,194 527 38,721
Intercompany advances-net 189,486 443,169 (632,655)
Stockholders' equity 865,775 233,743 157,608 (391,351) 865,775
-------- -------- -------- ----------- ----------
Total liabilities and
stockholders' equity $866,398 $907,906 $978,257 $(1,024,006) $1,728,555
======== ======== ======== =========== ==========
</TABLE>
10
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF FINANCIAL POSITION
(IN THOUSANDS)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,897 $ $ 2,897
Receivables - net 109,110 162,473 271,583
Inventories - net 39,222 47,879 87,101
Deferred income taxes 19,349 19,349
Other current assets 5,379 31,838 37,217
-------- -------- -------- --------- ----------
Total current assets 175,957 242,190 418,147
Investment in subsidiaries 213,404 150,339 (363,743)
Intercompany advances - net 628,979 (628,979)
Property - net 292,075 266,081 558,156
Deferred income taxes 112,574 20,092 132,666
Goodwill - net 171,551 395,709 567,260
Other assets 13,467 19,464 32,931
-------- -------- -------- --------- ----------
Total assets $842,383 $915,963 $943,536 $(992,722) $1,709,160
======== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78,740 $ 63,226 $ $ 141,966
Short-term borrowings and
current portion of long-term debt 6,015 28,343 34,358
Accrued employee
compensation and benefits 20,548 11,679 32,227
Income and other taxes 2,635 11,063 13,698
Other accrued liabilities 680 35,428 33,668 69,776
-------- -------- -------- --------- ----------
Total current liabilities 680 143,366 147,979 292,025
Long-term debt 276,461 246,543 523,004
Deferred income taxes 11,740 11,740
Accrued post retirement
benefits and other 39,343 1,345 40,688
Intercompany advances - net 243,389 385,590 (628,979)
Stockholders' equity 841,703 213,404 150,339 (363,743) 841,703
-------- -------- -------- --------- ----------
Total liabilities and
stockholders' equity $842,383 $915,963 $943,536 $(992,722) $1,709,160
======== ======== ======== ========= ==========
</TABLE>
11
<PAGE> 12
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,974 $ 19,974 $ 7,966 $(27,940) $ 19,974
Adjustments to reconcile net income to
cash provided by (used for) operating
activities:
Depreciation and amortization 9,136 13,663 22,799
Recognition of unearned compensation 375 375
Deferred income taxes 4,455 4,455
Income of equity investees (19,974) (7,966) 27,940
Changes in:
Receivables (8,710) (1,627) (10,337)
Accounts payable 7,395 (10,991) (3,596)
Inventories (558) 6,079 5,521
Other current assets and liabilities (57) 3,497 (5,451) (2,011)
Advances, net (4,374) (39,146) 43,520
Other, net 5,083 (15,135) (10,052)
-------- -------- -------- -------- --------
Net cash provided by (used for)
operating activities (4,431) (10,920) 42,479 27,128
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (5,802) (8,736) (14,538)
Proceeds from disposal of assets 334 1,265 1,599
Acquisition of business,
net of cash acquired (13,464) (13,464)
-------- -------- -------- -------- --------
Net cash used for
investing activities (5,468) (20,935) (26,403)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 4,431 4,431
Proceeds from borrowings-net 18,706 (21,544) (2,838)
-------- -------- -------- -------- --------
Net cash provided by (used for)
financing activities 4,431 18,706 (21,544) 1,593
Increase in cash and cash equivalents 2,318 2,318
Cash and cash equivalents
at beginning of period 2,897 2,897
-------- -------- -------- -------- --------
Cash and cash equivalents
at end of period $ $ 5,215 $ $ $ 5,215
======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,145 $ 9,145 $ 7,769 $(16,914) $ 9,145
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 8,801 5,570 14,371
Recognition of unearned compensation 330 330
Deferred income taxes 571 571
Income of equity investees (9,145) (7,769) 16,914
Changes in:
Receivables (6,847) 4,929 (1,918)
Accounts payable 1,314 2,688 4,002
Inventories (2,947) (1,011) (3,958)
Other current assets and liabilities (188) (14,124) 1,615 2,837 (9,860)
Other, net (1,474) 16,710 (11,985) (2,837) 414
-------- -------- -------- -------- -------
Net cash provided by (used for)
operating activities (1,662) 5,184 9,575 13,097
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (4,429) (5,979) (10,408)
Proceeds from disposal of assets 319 319
Acquisition on business, net of
cash acquired (3,700) (3,700)
-------- -------- -------- -------- -------
Net cash used for
investing activities (4,429) (9,360) (13,789)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,662 1,662
Proceeds from (reduction of)
borrowings-net 1,202 (215) 987
-------- -------- -------- -------- -------
Net cash provided by (used for)
financing activities 1,662 1,202 (215) 2,649
Increase in cash and cash equivalents 1,957 1,957
Cash and cash equivalents
at beginning of period 1,842 1,842
-------- -------- -------- -------- -------
Cash and cash equivalents
at end of period $ $ 3,799 $ $ $ 3,799
======== ======== ======== ======== =======
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's operations are primarily driven by the number of oil and gas
wells being drilled, the depth and drilling conditions of such wells, the
number of well completions and the level of workover activity worldwide.
Drilling activity, in turn, is largely dependent on the price of oil and
natural gas. This is especially true in the United States, where the Company is
expected to generate approximately one-half of its revenues during fiscal 1997.
Due to "aging" oilfields and lower-cost sources of oil internationally,
drilling activity in the United States has declined more than 75% from its peak
in 1981. Record low drilling activity levels were experienced in 1986 and 1992.
As a result, pumping service companies have been unable to recapitalize their
aging United States fleets due to the inability, under current market
conditions, to generate adequate returns on new capital investments. The
Company believes it is important to operate with a greater "critical mass" in
the key U.S. markets to improve returns in this environment. This conclusion
led to the decision in April 1995 to consolidate its U.S. operations with those
of The Western Company of North America ("Western"), which had a larger
presence in the United States.
The Company's U.S. critical mass was further increased through the acquisition
of Nowsco Well Service Ltd. ("Nowsco") in June 1996 which added operations in
the mid-continental and northeastern U.S., the latter being an area in which
the Company did not have an existing presence.
The rig count in the United States averaged 845 active drilling rigs during the
three months ended December 31, 1996, an 11% increase compared with the prior
year's first fiscal quarter. Much of the activity increase was due to increased
natural gas related drilling.
With the exception of Canada, international drilling activity has historically
been less volatile than domestic drilling activity. International drilling
activity during the most recent quarter increased by 5% compared with the prior
year's first fiscal quarter on the strength of development work in Latin
America (especially Venezuela) and Indonesia.
In both the U.S. and internationally, there has been a continuing trend by oil
and gas companies toward "alliances" with the service companies. These
alliances take various forms including packaged or integrated services, single
source suppliers and turnkey agreements. In excess of 20% of the Company's
revenues are generated under such alliances.
EXPANSIONS AND ACQUISITIONS
The Company's expansion and acquisition efforts over the past several years
have been focused on adding critical mass to its U.S. operations and
international geographic expansions of its existing product lines. The
acquisition of Nowsco (the "Nowsco Acquisition") in June 1996 contributed
towards both these efforts by giving the Company the number one pumping
services market position
14
<PAGE> 15
in Canada, where the Company had not operated since 1992, and adding to the
Company's existing market positions in several key U.S. and international
markets. The Nowsco Acquisition has added approximately 40% to the Company's
existing revenue base. The Company strengthened its market position in
Argentina in December 1996 by acquiring the remaining 51% interest in its
Argentine joint venture, NASA. The Company's original 49% share was acquired
through the Nowsco Acquisition.
RESULTS OF OPERATIONS
Revenue: Revenue increased by 65% during the quarter, primarily as a result of
the acquisition of Nowsco and a strong recovery in the U.S. oil and gas
markets.
The Company's U.S. pressure pumping operations had its best quarter in many
years with a 46% revenue increase over prior year's first quarter. Taking into
account prior year's Nowsco revenues, these operations showed a pro forma
revenue increase of 22%, benefiting from a 10.5% increase in the active rig
count. Revenues in most of the gas producing regions were up sharply, most
significantly South Texas. Management expects U.S. natural gas drilling
activity to remain strong during at least the next fiscal quarter, with a
smaller than normal seasonal decline.
The Company's international pumping service operations continued their strong
growth with revenues increasing by 94% (18% on a pro forma basis) from prior
year's first quarter. This represents the sixteenth consecutive quarter of
international revenue improvement. The Company's newly acquired Canadian
operations were particularly strong with pressure pumping revenues increasing
by 34% on a pro forma basis. Other areas showing the most significant revenue
increases were Norway, UK (mainly coiled tubing), Indonesia and Thailand. The
Company's Middle East region also had a strong quarter reflecting new contracts
in India, Egypt and Saudi Arabia. The Company's operations in Venezuela
continued to benefit from increased coiled tubing revenues resulting from the
addition of one coiled tubing barge since the previous year's first quarter.
Partially offsetting these gains were revenue declines in Argentina, due to a
slowdown by YPF, and the vessel stimulation business which reflects a
nonrecurring $3 million contract in the prior year in Tunisia. Management
expects the year over year international pumping service revenue increases to
continue over the next several quarters.
Revenues from the Company's other service lines, which include casing and
tubular services, process and pipeline services, and specialty chemical
services, increased by 84% (6% on a pro forma basis) from prior year's first
quarter due primarily to the acquisition of Nowsco. The Company's casing and
tubular services revenues increased 41% over the prior year's first quarter
resulting from the expansion of services to geographic areas outside the North
Sea. In addition, process and pipeline services revenues more than doubled due
to the addition of the former Nowsco operations, and revenues from the
Company's specialty chemical services increased 11%.
Operating Income: Operating income more than doubled as a result of the revenue
increase and higher operating margins resulting from efficiencies derived from
the combination of the Company's
15
<PAGE> 16
and former Nowsco operations and the operating leverage realized from the
increase in U.S. business. The cost of sales and services as a percentage of
revenue during the quarter was 1.2% lower than the prior year's first quarter
primarily as a result of cost reduction efforts implemented after the
acquisition of Nowsco and the economies of scale in having a larger U.S.
operation. Other operating expenses, excluding goodwill amortization, increased
by 42% primarily as a result of additional overhead from the former Nowsco
operations. The increase in goodwill amortization resulted from the Nowsco
Acquisition, which was accounted for under the purchase method of accounting.
Interest expense increased by $2.8 million from the prior year's first quarter
due to increased borrowings to fund the Nowsco Acquisition. See "Capital
Resources and Liquidity."
The effective tax rate of 28.6% was comparable to the prior year's first
quarter.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided from operating activities increased by $14.0 million from the
prior year's first quarter. Higher profitability, depreciation and amortization
were partially offset by higher receivable balances and the payment of merger
related expenses previously accrued for.
Net cash used for investing activities for the quarter was $26.4 million, a
$12.6 million increase from prior year's first quarter due to higher capital
spending and the acquisition of a business. Excluding acquisitions, capital
expenditures during the quarter were $14.5 million, or $4.1 million higher than
the spending in the comparable quarter of the prior year. The current quarter's
spending related primarily to international expansion opportunities, primarily
in Latin America, and upgrades of the Company's information systems. Other
investing activities included the acquisition of the remaining 51% interest in
the Company's joint venture in Argentina for total consideration of $13.5
million. Capital expenditures for fiscal 1997 are projected to be approximately
$70-80 million, excluding acquisitions, and are expected to include spending
for continued geographic expansions of all service lines, construction of
additional stimulation and coiled tubing vessels, additional capacity in
certain high margin locations and normal levels of replacement capital. The
actual amount of fiscal 1997 capital expenditures will be primarily dependent
upon the availability of expansion opportunities and will be funded by cash
flows from operating activities and available credit facilities. Management
believes cash flows from operating activities and available lines of credit, if
necessary, will be sufficient to fund projected capital expenditures.
As a result of cash from the exercise of stock options, the Company generated
net cash flows from financing activities of $1.6 million, after paying down
outstanding debt. Because net cash flows from operating activities were
sufficient to cover the Company's capital requirements, the Company was able to
reduce net borrowings by $2.8 million.
Management strives to maintain low cash balances while utilizing available
credit facilities to meet the Company's capital needs. Excess cash generated is
used to pay down outstanding borrowings. In June 1996, the Company replaced its
existing credit facility with a committed, unsecured bank
16
<PAGE> 17
credit facility (the "New Bank Credit Facility") executed to accommodate the
Nowsco Acquisition. The New Bank Credit Facility consists of a Canadian $320.0
million (approximately U.S. $234 million) six-year term loan, which is
repayable in 22 quarterly installments beginning in March 1997, and a five-year
U.S. $325.0 million revolving facility. At December 31, 1996, borrowings
outstanding under the New Bank Credit Facility amounted to $395.6 consisting of
$233.6 million under the term loan and $162.0 million borrowed under the
revolver. At December 31, 1996, principal reductions of term loans under the
New Bank Credit Facility are due in aggregate installments of $25,768,000;
$34,357,000; $43,928,000; $47,118,000; $47,118,000 and $35,339,000 in the years
ending September 30, 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The outstanding balance of the Company's 9.2% Notes, issued in 1991, was $12.0
million at December 31, 1996. Principal reductions of $6.0 million are required
annually each August until maturity on August 1, 1998.
The Company's interest-bearing debt represented 39.0% of its total
capitalization at December 31, 1996, a slight decrease from 39.8% at the
previous fiscal year-end. The Company's New Bank Credit Facility and 9.2% Notes
contain various customary covenants, including the maintenance of certain
profitability and solvency ratios and restrictions on dividend payments.
Management believes that the New Bank Credit Facility, combined with other
discretionary credit facilities and cash flow from operations, will provide the
Company with sufficient capital resources and liquidity to manage its routine
operations and fund projected capital expenditures.
At December 31, 1996, the Company had approximately $585 million of United
States tax net operating loss carryforwards expiring between 2000 and 2011.
With the Nowsco Acquisition, the Company acquired approximately $30 million of
U.S. tax net operating loss carryforwards, subject to certain limitations,
expiring between 2000 and 2011; approximately $75 million of non-U.S. tax net
operating loss carryforwards expiring in varying amounts beginning in 1997; and
approximately $7 million in non-U.S. tax credits which expire in varying
amounts between 1999 and 2009. Under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), the Company is
required to record a deferred tax asset for the future tax benefit of these tax
net operating loss carryforwards, as well as other items, if realization is
"more likely than not." The 1995 acquisition of The Western Company of North
America (the "Western Acquisition") provided the Company with a greater
critical mass with which to compete in the United States as it more than
doubled the Company's United States revenue base. In addition, with the
combination of Nowsco and Western, the Company has realized significant
consolidation benefits. Management estimates that in excess of $64 million of
overhead and redundant operating costs have been eliminated annually as a
result of the combination of the three companies. Management has concluded that
the Company's future taxable income will be sufficient over the remaining
carryforward periods to realize the tax benefits represented by approximately
$450 million of tax net operating loss carryforwards acquired with the
acquisitions of Western and Nowsco and generated by the Company's operations
prior to such acquisitions. Net tax benefits resulting from the acquisitions
approximate $120 million and have been included as a deferred tax asset
recognized in the purchase price allocation. Valuation allowances have been
established for the benefits of the tax net operating
17
<PAGE> 18
loss carryforwards that are estimated to expire prior to their utilization.
Management estimates that the utilization of net operation loss carryforwards
will result in cash taxes equal to approximately one-half of the book tax rate
over the next several years.
18
<PAGE> 19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by the Company
on October 21, 1996, describing amendments to the Company's
bylaws and amendments to its stockholder rights agreement.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BJ Services Company
(Registrant)
Date: February 14, 1997 BY \s\ Margaret Barrett Shannon
-------------------------------
Margaret Barrett Shannon
Vice President and General
Counsel
Date: February 14, 1997 BY \s\ Matthew D. Fitzgerald
-------------------------------
Matthew D. Fitzgerald
Controller and Chief
Accounting Officer
20
<PAGE> 21
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,215
<SECURITIES> 0
<RECEIVABLES> 283,881
<ALLOWANCES> 6,230
<INVENTORY> 84,920
<CURRENT-ASSETS> 430,021
<PP&E> 966,383
<DEPRECIATION> 391,845
<TOTAL-ASSETS> 1,728,555
<CURRENT-LIABILITIES> 318,146
<BONDS> 0
<COMMON> 3,831
0
0
<OTHER-SE> 861,944
<TOTAL-LIABILITY-AND-EQUITY> 1,728,555
<SALES> 341,092
<TOTAL-REVENUES> 341,092
<CGS> 271,957
<TOTAL-COSTS> 271,957
<OTHER-EXPENSES> 32,947
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 8,320
<INCOME-PRETAX> 27,992
<INCOME-TAX> 8,018
<INCOME-CONTINUING> 19,974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,974
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
